Accrual accounting
Accrual accouting is the practice of accounting for revenues in the period in which they are earned and for expenses in the period in which they are incurred. Under accrual accounting, for instance, a sale is recorded as revenue even if the customer has not yet paid (the revenue is part of accounts receivable).
Accrual accounting is standard, normal accounting practice. Accrual accounting contrasts with cash accounting, which accounts only for cash receipts and payments, and which is usually not acceptable for accounting purposes. In business, days, weeks, or even months may elapse between the time a sale is closed (contracted) and the time cash eactually transfers from buyer to seller. Customers may buy on credit, or may pay their account balance with a seller only once a month, or they may receive an invoice from the seller that allows 30 days or more to make payment (e.g., "...net due 30 days from receipt of invoice."). One tenet of accrual accounting is the belief that a company's financial situation changes more so when the sale is earned or the cost obligation incurred, than when cash payment is actually made.
The use of accrual accounting allows allows companies more easily to apply the matching concept--also standard practice in accounting—that is reporting revenues earned in the same accounting period with the costs and expenses that produced those revenues.
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